Impact of e-Rupee on Indian Economy and Banks
Many central banks around the world have been actively investigating the possibility of the concept of Central Bank Digital Currency (CBDC) for a while now. For instance, the Central of the Bahamas first introduced the Sand Dollar in October 2020, touting it as the first CBDC in the world at the time. The third round of e-krona testing has been started by Sweden’s central bank. Three megabanks and local banks in Japan will participate in experiments on a digital yen by the Bank of Japan (BoJ). The e-Rupee was also introduced by the RBI on November 1st, 2022. Therefore, the obvious question is- What exactly is an e-Rupee?
The electronic version of the rupee, or “e-Rupee,” has all the characteristics of actual currency. It is characterized as being issued by the Reserve Bank of India as legal money. It is interchangeable one for one at par with fiat money and functions just like a sovereign currency.
Although UPI has achieved exceptional success, it is merely a method for banks to transmit money using the IMPS payment rails that are already in place. India requires a new banking paradigm that will allow for the participation of modern technology businesses in providing financial services to all people, reinventing the traditional banking model and igniting a new financial revolution. And the digital rupee is a step towards that goal.
The main features of e rupee are as follows:-
1) The RBI issued it as a sovereign currency in conformity with their monetary policy.
2) It appears on RBI’s balance sheet as a liability.
3) Everyone must acknowledge it as a valid method of payment, legal tender, and a secure place to keep money by all private parties, public institutions, and governmental bodies.
4) It is freely convertible into cash and money from commercial banks.
5) The digital rupee is a fungible legal tender; therefore, its owners do not require a bank account.
6) It is expected to lower the cost of the issuance of money and transactions.
The e-Rupee was introduced for a number of reasons:-
1) Reduction in the price of managing physical cash.
2) To advance digitalization in order to transition away from a cash-based economy.
3) Supporting payment innovation, efficiency, and competitiveness.
4) To investigate CBDC’s potential for enhancing international trade.
5) Be in favor of financial inclusion.
6) Protect the general public’s faith in the national currency against the emergence of crypto assets.
Based on usage, functions carried out by the CBDC, and varied levels of accessibility, there are essentially two categories of e-Rupee: retail and wholesale segments. Consumers would keep their e-Rupee in an account or wallet with a bank or service provider under the RBI’s indirect model of issuance. The intermediaries, not the RBI, would be responsible for providing digital rupee upon request. Only the intermediaries’ wholesale CBDC balances would be monitored by the central bank. The RBI will make sure that all of the retail balances accessible to retail clients are similar to the wholesale CBDC balances.
The e-Rupee is not intended to bear interest because it is non-numerative. It assists in preventing a significant disruption of banking services and the potential for bank disintermediation. Additionally, creating a non-interest-bearing digital currency makes sense, as actual cash does not earn interest.
The retail component of the e-Rupee is a token-based system, with a digital token issued by and indicating a claim on the RBI. This digital token would serve as the digital version of a banknote, transferable electronically from one holder to another. The wholesale segment, in contrast, uses an account-based system that requires the identity of the account holder to be confirmed when a new CBDC account is created. Payment transactions might be made quickly and securely after that point.
Compared to current digital transactions, transactions made using the digital rupee are more anonymous. The owner of the wallets is unknown to the government or ecosystem intermediaries. Therefore, despite the fact that the transactions are recorded in the centralized ledger, they are still largely anonymous.
For the straightforward reason that cryptocurrencies cannot be controlled, the RBI has consistently maintained its strong opposition to the usage of private virtual currencies. Yet given the rise of digital payments, cryptocurrency offers indisputable advantages over traditional cash that the RBI wants to capitalize on. All the advantages of cryptocurrencies are brought to the economy by introducing the digital rupee while the security of regulated, legal tender is preserved.
The possibility of using a different payment method for the goods and services they purchase is the most significant advantage for individual consumers. The Digital Rupee is likely another payment system cog, just like UPI, NEFT, or online banking. However, it would be interesting to see if the digital rupee creates its own market or if it will compete with UPI payments. Consumers need more incentives to adopt the digital rupee over UPI payments.
In India, there are still more than 540 million non-smartphone users.
The implication is that the e-Rupee may not be compatible with non-smartphone users for payment transactions. It might result in more non-smartphone users being financially excluded. Another issue is that although there are over 800 million smartphone users in India, many still don’t utilize mobile banking or electronic payments. It may raise the danger of financial exclusion.
Also, literacy difficulties are preventing the digital rupee from being widely used in India. A significant portion of the population relies on wages and needs more digital or financial literacy to quickly adopt the e-Rupee in India. It might prevent it from being widely accepted in India. In 2021, 52.4% of India’s GDP was expected to be informal. When people don’t want their transactions to be watched over by the government, there may be substantial opposition to the adoption of the digital rupee in the informal sector. This means that the e-Rupee might not be welcomed or well-perceived in the informal economy.
Notwithstanding these difficulties, the Digital Rupee is incredibly promising for many facets of Indian society. It is an essential step to assist the development of Indian society and the country’s monetary system. It can act as a spark to encourage growth in particular Indian economic sectors.
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